Paper 44790 1 RURAL WATER SUPPLY IN INDIA Willingness of Households to Pay for Improved Services and Affordability The World Bank Policy Paper extracted from the World Bank Study on Review of Effectiveness of Rural Water Supply Schemes in India, June 2008 June 2008 Rural Water Supply in India: Willingness of Households to Pay for Improved Services and Affordability T here is an impression that the willingness Methodology for Assessing to pay (WTP) and affordability of rural Willingness to Pay households for water supply is not sufficient to cover the operation and The contingent valuation (CV) method has been maintenance (O&M) cost of supply. This has used in the study to assess the willingness to pay often been the basis for not charging, or not for improved services by rural households. This adequately charging the rural households for method has found wide application in empirical water supply, with the consequence that most studies to assess the demand for improved water schemes lack funds for adequate O&M. In the services.1 This study has used the payment card 10-state study on the Effectiveness of Rural Water or checklist contingent valuation method, in Supply Schemes undertaken by the World Bank which the respondent is asked to indicate the at the request of the Government of India, the maximum amount s/he would be willing to willingness to pay and affordability aspects for pay from an ordered set of values, ranging from improved water supply services have been zero to `Rs X or more' per month. Several important issues for investigation. variants of the payment card method are in use, including the recent payment ladder method. A study on the willingness to pay provides an From an ordered set of values (payments), the indication of the value that consumers place on respondent indicates the amounts that s/he improved water supply and an assessment of the would definitely pay (ticks) and the amounts demand for service improvement. A study of that s/he would definitely not pay (crosses). affordability provides guidance on tariff setting, helping to ascertain how far the consumers will For the study, two formats were used--payment be able to pay the cost of improved services. card and payment ladder. The payment card format was used to elicit respondent willingness to pay for improved services of handpump, while the payment ladder format was used to elicit respondent willingness to pay for improved 1See, for instance, J. Ahmad, B. Goldar, S. Misra and M. Jakariya, Fighting arsenic, listening to rural communities: Willingness to pay for arsenic-free, safe drinking water in rural Bangladesh, New Delhi, Water and Sanitation Program, 2003; James F. Casey, James R. Kahn, and piped water supply. Using a simple payment card Alexandre Rivas, `Willingness to pay for improved water service in Manaus, Amazonas, Brazil,' Ecological Economics, 58 (2), 365-372, 2006; Dale Whittington, S.K. Pattanayak, J. Yang, and method for handpump users allows for several K.C. Bal Kumar, `Household demand for improved piped water services: Evidence from service improvement options including a switch Kathmandu, Nepal,' Water Policy 4, 531-556, 2002. 2 Paper 1 for W illingness Impr oved of Services Households and Affor toPa dability y to piped water systems and add-on facilities A study on the willingness to pay (such as a fluoride or arsenic filter) with the provides an indication of the existing handpumps. value that consumers place on improved water supply and The improvements in water service scenarios and an assessment of the demand for the structure of payment card differed between service improvement piped water users and handpump users. For piped water users, the improvement scenario was specified as better operation and maintenance of the infrastructure or replacement of the existing water and their willingness to pay for such scheme by a new, better functioning scheme. measures assessed. Similarly, in arsenic-affected districts of West Bengal, the handpump users In both cases, the respondent was to get better were offered the option of getting arsenic-free services in terms of more water, longer hours of water and their willingness to pay for such supply, regular supply, and so on. The capital measures assessed. cost contribution that the responding household will have to make for the improvement in the Econometric models were estimated to relate services was specified. For handpump users, the willingness to pay with the socio-economic improved services were specified as better characteristics of respondents and their families, maintenance of the handpump. Other options household income, and other variables were also explored, such as a new handpump, representing the level of services they are or a new piped water scheme in the village. In currently receiving. The estimated econometric several fluoride-affected states handpump users models were used to derive the mean willingness were offered the option of getting fluoride-free to pay of households. 3 How Much are Rural Households Willing to Pay? The estimates of the willingness to pay obtained from the survey data indicate that the amount that households are willing to pay in general is sufficient to cover the O&M cost of improved services. The households are also willing to contribute to the capital cost of improving the scheme. The households using private connections are in general willing to pay about Rs 60 (US$1.4) per month, ranging between Rs 30 to Rs 70 per month for improved services (Figure 1). The households using standposts of piped water schemes are in general willing to pay about Rs 20 (US$0.5) per month, ranging between Rs 13 to Rs 24 per month towards the O&M cost of improved schemes. Households using private connections are willing to contribute on an average Rs 500­850 (US$11­19), while the households using standposts are willing to pay about Rs 400­700 (US$9­16) towards the capital cost of improved schemes. Among households currently using handpump Rs 20 per month if the handpump scheme is well schemes, the average willingness to pay for better maintained and is supplemented with household maintenance of the existing public handpumps is arsenic filters. They would pay Rs 11 per month if about Rs 6 (US$0.1) per month and ranges from the handpump scheme is well maintained and is Rs 5 per month in Uttar Pradesh, Orissa, and supplemented with a community arsenic filter. In Tamil Nadu to Rs 8 per month in Kerala, and Tamil Nadu, similarly, households are willing to Rs 11 per month in Punjab. For new handpumps, pay on average Rs 5 per month for better the average household willingness to pay for the maintenance of the existing handpumps, and maintenance of the handpump ranges from Rs 6 would pay Rs 5 extra per month for having a per month in Uttar Pradesh to Rs 9 per month in community fluoride filter and about Rs 10 extra Kerala, Maharashtra, and West Bengal. The per month for a household fluoride filter. The average across states is about Rs 8 (US$0.2) implication is that households are ready to pay for per month. In areas affected by fluoride or the use of fluoride and arsenic filters in areas arsenic, the households using handpumps show where these are needed. This contribution can concern about water safety and willingness to pay cover, at least partly, the cost of the maintenance for the use of filters. In West Bengal, for of the filters. example, the households in arsenic-affected areas are willing to pay Rs 8 per month on Methodology for average for better maintenance of the existing Assessing Affordability handpump or a new handpump, and would pay There is limited literature on the methodology to assess how much a household can afford to pay 2 Available literature on `affordability' aspects includes: `Water prices in CEE and CIS Countries: A toolkit for assessing willingness to pay, affordability, and political acceptability', for water supply and sewerage services.2 The Danish Cooperation for Environment in Eastern Europe, Ministry of Environment, March 2002; and `Towards defining and measuring affordability of utilities', Discussion Paper, Asian Development Bank has suggested a norm Public Utility Access Forum, UK, no date. of 5 percent of household income, and the World 3 See, for example, Paddy Hillyard and Fiona Scullion `Water affordability under the water reform proposals', School of Sociology and Social Policy, Queen's University, Belfast, Bulletin Bank a norm of 3­5 percent. In a number of No 9, September 2005; John W. Sawkins and Valerie A. Dickie, `Affordability of water and sewerage services in Great Britain', Department of Economics, School of Management and studies undertaken in the UK, the affordability Languages, Heriot-Watt University, Edinburgh, 2002; and Martin Fitch, `Unaffordable Water,' criteria is taken as 3 percent of income.3 This Centre for Utility Consumer Law, University of Leicester, July 2003. 4 Paper 1 for W Figure 1 Willingness to Pay for Improved Services--Piped Water Users illingness Impr oved of Services Households and Affor toPa dability y Source: Computed from household survey data. The underlying assumption is that if poor households can pay 3 percent of their income towards the water bill, then households with higher income can also spend 3 percent of their income on the water bill criteria has been estimated by taking twice the median spending of households on water charges as a percentage of disposable income, and alternatively by taking the ratio of the water bill to the income of the bottom 30 percent of households (in terms of income). The underlying assumption is that if poor households can pay 3 percent of their income towards the water bill, then households with higher income can also spend 3 percent of their income on the water bill. The methodology applied for ascertaining the affordability norm for the UK (based on the observed ratio between the water bill and the 5 affordability norm, as this will lead to an the underestimation of affordability. The affordable payment for a private connection has been computed by taking the average income of rural households and applying the affordability norm, and the affordable payment for standpost users has similarly been computed by taking the average income of the BPL (below poverty line) households. How Much can Rural Households Afford to Pay? Affordable payment for piped water varies across income of the bottom 30 percent of households) states. The monthly affordable payment per has been adapted and used in the study to assess household for a private connection is assessed at the issue of affordability of rural water supply Rs 30­40 in Orissa and Tamil Nadu, Rs 30­45 in schemes in the 10 states surveyed. If this Andhra Pradesh, Rs 30­50 in West Bengal, Rs methodology is to be strictly followed, then the 50­60 in Karnataka, Maharashtra and monthly payment made by households for piped Uttarakhand, Rs 50­70 in Uttar Pradesh, Rs 90­ water supply schemes as a ratio to their income 110 in Kerala, and Rs 100­130 in Punjab. The should be computed for the bottom 30 percent monthly affordable payment per household with of households, and on that basis the affordability regard to standposts is in the range of Rs 11­13 norm should be derived. However, three per month in Uttarakhand and Rs 15­20 per modifications have been made to arrive at a month in Andhra Pradesh, Orissa, and West more rigorous assessment of affordability: Bengal. Affordable payment is relatively higher at Rs 20­25 per month in Karnataka, Rather than considering only the bottom Maharashtra, Tamil Nadu, and Uttar Pradesh. 30 percent of households, the relevant ratio The level is still higher in Kerala (Rs 30­35 per has been separately computed for the bottom month), and Punjab (Rs 40­50 per month). 20 percent, 40 percent, and 50 percent of households. There is a positive correlation between the Along with the monthly payment made for ranks of states in terms of affordability and piped water, other water-related expenses (for willingness to pay towards the O&M cost of example, the repair and maintenance of their piped water supply. Punjab tops in both own tubewell or dug-well, and the repair of affordability and willingness to pay, while public water sources) have been considered. Andhra Pradesh and Uttarakhand rank low both A number of households are neither making in terms of affordability and willingness to pay. any payment for the water they get from the However, in general, the household willingness supply schemes, nor do they incur any to pay in different states is less than the expenses on their own water sources or public assessed affordability. This is especially water sources. Such households have been marked in the case of Uttar Pradesh excluded from the computation of the and Karnataka. 6 Paper 1 for W Figure 2 Willingness to Pay, Affordability, and Non-Essential Expenditures (percent of household income) illingness Impr oved of Services Households and Affor toPa dability y Source: Estimates of WTP and affordability are based on household survey data. Data on the expenditure on non-essential items are taken from Level and Pattern of Consumer Expenditure, 2004­05. NSS 61st Round (July 2004­June 2005), National Sample Survey Organisation, Ministry of Statistics, and Programme Implementation, Government of India, December 2006. Overall, the cost of improved water supply in The average expenditure on rural areas is within affordable limits. Almost all non-essential items incurred by households using public handpumps can afford rural households in various to pay Rs 5 per month to cover the cost of states is commonly more than maintenance of the handpumps, and almost all the estimated willingness to pay households using standposts in piped water and affordability for a schemes can afford to pay Rs 10 per month to private connection cover the cost of the proper maintenance of piped water schemes. To fully recover the O&M cost of typical piped water schemes, it would be necessary to charge private connection users at the rate of about Rs 50 per month. For new schemes, a capital contribution of Rs 600­1,500 average. The affordable payment level is about would be necessary. Most non-BPL households 1.7 percent on average. The expenditure on can afford to pay this amount. non-essential items as a proportion of total consumption expenditure (taken as a proxy for The average expenditure incurred by rural income) is about 2.6 percent on average households on non-essential items (pan, bidi, (Figure 2). As regards standposts, the willingness other tobacco products, and intoxicants) may be to pay as a portion of income is about taken as an alternate indicator of the amount 0.5 percent and affordability is 0.7 percent, they can afford to pay for water supply. The on average. The expenditure on non-essential average expenditure on non-essential items items incurred by the bottom 30 percent incurred by rural households in various states is households is 2.7 percent of their total commonly more than the estimated willingness consumption expenditure. Evidently, the to pay and affordability for a private connection. estimates of willingness to pay and affordability The willingness to pay for a private connection as are well within the amount that rural households a proportion of income is about 1.5 percent on spend on non-essential items. 7 Conclusion The main conclusion that may be drawn from The analysis shows that an additional the study is that affordability or willingness to Rs 4 billion could be made available pay is not an issue for improving rural water service delivery. Indeed, the charges being each year, if households are charged collected at present are generally much lower according to their willingness to pay. than what the households can afford and are With these resources, the coverage willing to pay. The level of cost recovery can can be increased by 14 percent be substantially raised by improving the services and charging the households according to their willingness to pay. The analysis shows that an additional Rs 4 billion could be made available each year, if schemes. In certain circumstances, the cost can be households are charged according to their prohibitively high and 100 percent O&M cost recovery may willingness to pay. With these additional be unaffordable. resources, the coverage can be increased by 14 percent. In such cases, the beneficiary household could be asked to pay up to a `ceiling' level, say, Rs 60­70 per month, and the cost Another conclusion that may be drawn is that beyond that level should be subsidized. For BPL households, it would not be right to insist on 100 percent the ceiling should be lower for capital and O&M cost O&M cost recovery in all demand-driven contributions, based on the affordability criteria. This Report has been prepared by Smita Misra (Sr. Economist, SASDU, World Bank), the Task Manager of this study. The study was carried out under the overall guidance of Sonia Hammam, Sector Manager, Water and Urban, SASSD, World Bank. Data analysis has been undertaken by Professor B.N. Goldar and his research team at the Institute of Economic Growth, Delhi and the consumer survey was carried out by the ORG Centre for Social Research (a division of A.C. Nielsen ORG MARG Pvt Ltd). Comments and inputs at various stages of preparation from the following World Bank persons are gratefully acknowledged: Michael Carter, Rachid Benmessaoud, Clive G. Harris, Alain R. Locussol, Francis Ato Brown, Alexander E. Bakalian, Oscar E. Alvarado, G.V. Abhyankar, R.R. Mohan, S. Satish, N.V.V. Raghava, and Policy Papers Catherine J. Revels (WSP-SA). Special thanks are due to the Department This is one of the six policy papers that have been prepared on the basis of the of Economic Affairs, Ministry of Finance, the Department of Drinking Water World Bank study on Review of Effectiveness of Rural Water Supply Schemes in Supply, Ministry of Rural Development, and the Rajiv Gandhi National India (June 2008). These policy papers, published along with the Report, are on the Drinking Water Mission for their interest and collaboration in the study. following themes: Comments and data inputs during the preparation of the Report are Paper 1: Willingness of Households to Pay for Improved Services and Affordability gratefully acknowledged from R.P. Singh and M. Nagaraju (DEA), Paper 2: Inefficiency of Rural Water Supply Schemes in India Bharat Lal and R.K. Sinha (RGNDWM) and their team, and the Paper 3: Multi Village Water Supply Schemes in India respective State Government officials. Paper 4: Operation and Maintenance Expenditure and Cost Recovery Paper 5: System of Monitoring and Evaluation The Report has been discussed with the Government of India but does not Paper 6: Norms for Rural Water Supply in India necessarily bear their approval for all its contents, especially where the Bank has stated its judgements/opinions/policy recommendations. Author and Task Manager: Smita Misra (Sr. Economist, SASDU, World Bank The World Bank Pictures by: Guy Stubbs/Water and Sanitation Program­South Asia June 2008 Created by: Write Media Printed at: PS Press Services Pvt. Ltd. The World Bank, New Delhi Office, 70 Lodi Estate, New Delhi 110 003, India Tel: (91-11) 24617241, 24619491